To provide a leg-up to Micro, Small and Medium Enterprises (MSMEs), a Reserve Bank of India panel has made a series of recommendations, including establishing a system of professional credit intermediaries/ advisers, to help both the sector and banks in credit assessment and encouraging multiple guarantee agencies to provide credit guarantee in niche areas.

The RBI committee observed that for MSMEs, professionals who can evaluate the creditworthiness of these firms by acting as intermediaries with the bank, can help bridge the significant credit gap in this sector.

While varying estimates point to the potential and need for credit among undeserved MSMEs, a study by International Finance Corporation estimated the overall finance gap in the MSME sector at Rs. 21 lakh crore in 2009-10. It comprises a debt gap of Rs. 19 lakh crore and an equity gap of Rs. 2 lakh crore.

The potential demand for external finance was estimated at Rs. 28 lakh crore as against total finance of Rs. 7 lakh crore from formal sources. The committee recommended that any policy action for the MSME sector would need to consider several possibilities, be it new institutions or intermediaries that can help bridge the information gaps that plague these entities or even innovative ways of providing finance to this sector.

To achieve greater financial inclusion and financial deepening in a manner that enhances systemic stability, the committee felt that there is a need to move away from a limited focus on any single model to an approach where multiple models and partnerships are encouraged to emerge.

In the context of ensuring greater credit flow to MSMEs, this calls for the emergence and strengthening of specialized institutions, such as non-banking finance companies and micro finance institutions that focus on the provision of credit for different types of MSMEs. According to the panel, the regulatory system needs to ensure that such institutions expand and multiply.

Keeping in view the extant overexertion of guarantees by the Credit Guarantee Scheme Trust for Micro and Small Enterprises (CGTMSE), the committee recommended that multiple guarantee agencies, both public and private, that can provide credit guarantees in niche areas may be encouraged. This will not only reduce the burden on the CGTMSE but also make the extant insurance scheme economically viable.

In order to deepen the credit guarantee market, the committee suggested that the role of counter guarantee and re-insurance companies should be explored.

MSMEs that can provide collateral should not be put under the guarantee scheme, thereby reducing the pressure on the CGTMSE.

Accordingly, the committee recommends a system of unique identification for all MSME borrowers and the sharing of such information with credit bureaus.

Source: Business Line